NEL Holdings South Ltd Management Discussions.

Socio Economic Environment

The global economic activity was marked by the escalation of US China trade tensions, the Middle East geopolitical turmoil followed by the plummet in crude oil prices and the disruption in operations and supply chains across the world because of the impact of Covid-19. The pandemic has brought upon such a drastic impact on the world economy that according to the IMF (International Monetary Fund), the global economy is expected to shrink by over 3% in 2020-the steepest slowdown since the Great Depression of the 1930s. Indias GDP growth was dragged down to 4.2 % in FY2020, weakest since the financial crisis hit more than a decade back. The RBI has projected a negative growth rate for FY2021 without mentioning any figure.

Real Estate Market

Indian Real Estate Market

There has been a series of radical and transformational reforms such as demonetisation, Real Estate Regulation & Development Act (RERA), FDI relaxations, GST, Benami Transactions (Prohibition) Amendment Act, Change in Accounting standards, all coming in a row and in quick succession. This has helped in increasing the transparency of Indian real estate transactions, making it more credible and attractive with only organized players on the ground. Home ownership being a priority ambition and investment objective for Indians, these reforms will have positive implications for home buyers and the sector in long term. However, for short term, these procedural hurdles and challenges have out developers and ongoing projects off-guard and developers are still trying to meet the compliance requirements, and adjust to and move with the changes taking place in the sector and its regulations.

The residential real estate market has been ruffled in the last few quarters and Bengaluru was viewed as a relatively better performing marketing against all the other cities. The sales however have been considerably less than before. However, it is attracting only end users and investors are staying away from the market. The cycle time for purchase decisions has become longer. The homebuyer community may defer their purchase decisions in light of the pandemic. With reduced price appreciation, real estate hasnt been an attractive investment for investors who are relatively keeping away from the market. Even for end user sales, customers have been preferring established developers with proven track record or more so projects with completion / OC or projects nearing completion to reduce the purchase risk.

Real Estate Regulation & Development Act (RERA) came into effect and in the state of Karnataka with notification dated 10th July, 2017. This has enforced transparency and accountability requirements for developers and will increase the confidence of the consumers. The Goods and Service Tax (GST) and Benami Transactions (Prohibition) Amendment Act will also have a major impact on the operations of the real estate developers.

Ministry of Housing and Urban Poverty Alleviation (MoHUPA) has introduced in June 2015, an interest subsidy scheme called Credit Linked Subsidy Scheme (CLSS) under Pradhan Mantri Awas Yojana (URBAN)-Housing for All, for purchase/ construction/ extension/ improvement of house to cater Economical Weaker Section (EWS)/Lower Income Group (LIG)/Middle Income Group (MIG), given the projected growth of urbanization & the consequent housing demands in India. The qualifying criteria for affordable housing have been relaxed. This effectively increases the size of affordable housing market across India. These segments saw several new launches and were marketed under the buzzword of "smart", "millennial", "efficient" homes.

The office market clocked an all-time high transaction of 60.6 mn sq ft in FY 2019-20, signalling the robustness of the market. However, owing to Covid-19 and its implications, many feel that leasing will come under pressure in FY 20-21 and FY 21-22.

Bengaluru Real Estate Market

Bengaluru continues to be one of the most preferred destinations for real estate. It has witnessed phenomenal migration in last few decades to become the Silicon Valley of India with a 40% share of IT industry. Due to good market drivers - IT/ITes sector - which ensures strong macro-economic dynamics, most home buyers find Bengaluru a perfect place to settle and retire. There has been a significant decline in the absorption, however Bengaluru has been affected to a lesser extent as compared to the other cities in India. Economic growth is driving home prices upwards in Bengaluru with around 5% growth in 2019, a figure which is higher than both Mumbai and Gurugram, which had little or no growth. Rental growth also saw an uptrend in 2019(6.5%) with improvements in infrastructure. Bangalore has been one of the stable and fast growing office spaces of recent years but complacency would not help and developers would have to constantly review and adapt to changes and dynamic needs of the market. Work From Home trend picking up among IT companies (who are major tenants in Bangalore) could see pressure on demand and rental rates for office spaces.

The Company

Company Overview and Market Positioning

NEL Holdings Limited (Formerly Nitesh Estates Limited) ("NEL" or "Company") is an integrated property developer and one of Indias most recognized luxury real estate brands with presence in multiple asset classes: Residential, Commercial and Hotel. Since inception, the Company has brought over 21.60 mn sq. ft. of area under development. The Company made its initial public offering in May 2010 and was listed on the Bombay Stock Exchange and the National Stock Exchange. The Company has a very strong brand equity, business processes and partnerships to attain the next stage of growth. Since inception, the Company has completed many projects across residential, commercial and hospitality segments and currently has 14 ongoing residential projects.

NEL has a comprehensive corporate governance framework with an eminent Board and strong management team with significant experience across industries. In line with best in class corporate governance practices, the Company has a high proportion of Independent Directors.

Operational Performance

During the year, the Company sales very not satisfactory and was eventually affected due to recession and drop in demand in real estate market. The Company is planning to diversify its business and expand its business opportunities in new areas of business like providing manpower for facilities management business, securities business and other service oriented businesses in the future.

Financial Performance in IND-AS (Figures)

NEL generated revenue of Rs. 523.70 Million, compared with FY 2019 revenue of Rs. 1131.50 Million. The Earnings before interest, tax, depreciation and amortization (EBITDA) was Rs. (-) 6776 Million as compared to Rs. (-) 700.90 Million in the previous year. The Profit / (Loss) after taxes during the year was Rs. (6823.70) Million.

There were 10 projects under income recognition during the year. The Company expects increased revenue going forward owing to various projects getting to advanced stages of construction.

Revenue Breakup: - IND-AS (Figures)

Rupees in lakhs FY2020 % share FY2019 % share
Property Development 4,069 97.70 5,686 50.25
Contractual Activities / Other Operating Income 0 0 0 0
Income from Sale of Land 0 0 5,500 48.60
Maintenance Income 96 2.30 106 0.93
Lease Rent 0 0 0 0
Misc. - Other Income 0 0 23 0.22
Total 4,165 11,315

Financial Condition IND- AS (Figures)

Particulars March 31, 2020 March 31, 2019
Sources of funds
a. Shareholders funds (74,559) (29,649)
b. Minority Interest - -
c. Loan funds 1,01,678 1,02,067
Total 27,119 72,418
Application of funds
a. Fixed assets (net) 13,905 41,904
b. Investments 1,008 5,343
c. Net current assets 4,215 19,377
d. Deferred tax/ miscellaneous expense, among others 7,991 5,794
Total 27,119 72,418

 

Particulars 12 months ended March 31, 2020 12 months ended March 31, 2019
Profit before tax (77,592) (16,457)
Add: Adjustments 73,553 (6,011)
Add: Net working capital 9,401 24,212
Less: Income Tax paid (73) (6)
Net cash flow from operating activities 5,287 1,738
Net cash flow from investing activities 4,103 3,926
Cash flow from financing activities (9,564) (5,937)
Net cash inflow / (outflow) (174) (273)

Liquidity

As of March 31, 2020, the Company had cash and cash equivalents of Rs. 1,39,86,562/-. On a standalone basis, the Company had a total debt of Rs. 524,75,36,162/- and the net worth was at Rs. (-) 817,91,74,559/-. The Company is closely monitoring the debt levels and plans to reduce the high cost debt from the cash generated from on-going projects and exiting some non-core assets in the portfolio from time to time.

Business Strategy

Complying with Real Estate Regulation and Development Act

The main motive behind establishment of Real Estate Regulation and Development Act (RERA) is to ensure that real estate transactions happen in an efficient and transparent manner and to protect the interest of the consumers along with establishment of an adjudicating mechanism for speedy dispute redressal. NEL has geared up its internal processes for becoming compliant with the requirements of RERA.

Revenue diversification and expansion of rental income

NEL has been strategically focused on diversifying its revenue to include recurring income stream by venturing into leasable office spaces. These are long term investments with a longer gestation period. The Company intends to expand its rental revenue in next 5 years. With higher landowner expectations, tough liquidity situations, increasing costs with tightened margins, company is carefully evaluating proposals to find feasible options.

Exploring new opportunities

Warehousing: With the boom in the 3PL and e-commerce players adopting organised warehousing and taking up warehousing spaces, organised warehousing is gaining traction in the Indian market. To cater to this demand from e-commerce and supply chain players, we will develop a portfolio of warehousing assets in the next 5 years. Our first set of warehouses will be coming in Bangalore and Chennai.

Data Centre: India represents the second largest internet user base in the world, with consumption expected to grow with the continued advancement of internet infrastructure, smartphone ownership and penetration of 4G and 5G. India is emerging as a destination for data centre investments and is expected to exceed $1 billion in 2020. Over the next few years, the company will build a strategy around owning data centre portfolio.

Facility Management : Having gathered experience of Property Management by way of operation of its subsidiary LOB Property Management Private Limited, which was/is catering to the Facility Management services and requirements of completed projects of NEL Holdings Ltd and its other subsidiaries, we see great potential in the business of Property Management services where there is need for quality professional players to provide integrated management solutions including security, housekeeping, MEP maintenance, landscaping and external development management, capex improvement, etc. It is a competitive but booming sector wherein there is great demand in several residential and commercial spaces for branded maintenance services / companies. While the margins are modest, increased scale would provide economies in terms of cost efficiency and improved margin apart from helping the topline. NEL intends to develop this vertical / arm in future by bidding for and managing more projects across Bangalore, not just limiting to NEL Holdings portfolio of completed projects. This would help in related diversification by utilizing existing resources and capacities.

Selective geographic expansion

The Company believes that deep insights into the community and clientele and a thorough understanding of the policies, priorities and processes of the local Government are essential factors that drive success. In line with this belief, NEL has chosen to operate in the South Indian market. Majority of the ongoing and upcoming projects are located in Bengaluru, where the Company has strong experience of executing several projects since its incorporation. Furthermore, Bangalore is considered to be one of the best real estate markets in India. NEL is also selectively pursuing opportunities in other southern cities such as Chennai, Kochi and Goa.

Managing and promoting talent

NELs culture is focused on customer-centricity, collaborative team work, result orientation, entrepreneurial mind set and developing people. One of the key growth strategies at NEL is to manage and promote talent by providing growth opportunities, rewards, respect, learning and fun. The Companys employees are both an important stakeholder group and key players in its business. With their skills and achievements, the Company is driving a culture of innovation and sustained growth for NEL.

investment in systems and technologies

Information Technology continues to support all aspects of business and operations at NEL through continued investment in enterprise wide SAP platform including data analytics.. The Company continues to explore and implement new emerging technologies for furthering business objectives. IT forms the core of all communication and information exchange for ongoing monitoring and effective decision making.

Opportunities and Threats

Demand for residential real estate has increased with rapid rise in urbanization. Millions of people migrate to cities every year, not only driving demand for homes but also giving rise to demand for commercial and retail spaces. The benefits to the economy, commonly termed as the demographic dividend is benefitting the real estate sector. There are growing requirements of space for sectors such as education and healthcare. Implementation of Real Estate Regulation and Development Act (RERA) has helped bring in more transparency to the real estate transactions and boosted buyers confidence. The disposable income has been steadily increasing and there is easier availability of consumer finance coupled with a declining interest rate trend. All the aforesaid aspects result in opportunities in all segments of real estate.

The key threats to real estate business emanate from the cyclicality of the business owing to the tide and ebb in consumer and business confidence. Going forward, with the e-commerce market in India making itself look attractive, can pose a serious threat to the retail real estate. Other immediate challenges to the business are from:

• Environmental risks such as depletion of water table

• Potential impact of Covid-19 resulting in delay of construction activities and negatively influencing market sentiments

• Sales market risks - Economic and market conditions might influence customers to defer or cancel their home purchase decisions

• increase in cost of commodities and building materials

• Land related risks

• increase in interest rates which could result in depressed demand from customers and at the same time increase our Interest burden

• shortage of labour and skilled technical manpower and the consequent upward pressure on cost of human resources

• Risk of legal disputes

• Inflation and exchange rate risks

• regulatory and policy changes results in higher costs and delays in approvals related with projects Risk management

The Company has an established enterprise risk management framework to optimally identify and manage risks, as well as to address operational, strategic and regulatory risks. The ability to anticipate risks and respond effectively is critical for achieving the Companys objectives and provides value to stakeholders. The risk management process also addresses long term strategic and operational planning, talent acquisition and retention, treasury management, financial reporting and controls, information technology and security, environment health and safety compliance, legal, taxation, communication, regulatory compliance and code of conduct for employees. The Company believes that risk is an integral part of every business and promotes a culture of building ability to anticipate and manage the risks effectively and converting them into opportunities. Risk assessment is conducted by the risk management committee and the program is reviewed periodically by the Audit Committee.

There are several areas of risk related with:

• the macroeconomic environment

• Regulatory risks - laws governing the acquisition, construction and development of land

• Land title and ownership risks

• the information technology systems and disaster recovery

• the project management resulting in deviation from planned time, quality, cost and safety

• the availability and cost of building materials

• Liquidity risks

• the availability of finance and the cost of financing

• the human resources - their availability, costs and compliance with the code of ethics of the Company

• the vendors and business partners

• the assets of the Company

• Competitors and Customer risks

Internal Control Systems

NEL has an elaborate internal control system which monitors compliance to internal processes. It ensures that all transactions are authorized, recorded and reported correctly. Well established and robust internal audit processes, both at business and corporate levels, continuously monitor the adequacy and effectiveness of the internal control environment across the Company and the status of compliance with operating systems, internal policies and regulatory requirements. In the networked IT environment of the Company, validation of IT security continues to receive focused attention of the internal audit. The Internal Audit team of the Company independently evaluate the adequacy of internal controls and concurrently audit the majority of the transactions in value terms. Independence of the audit and compliance is ensured by direct reporting to the Audit Committee of the Board.

In order to ensure compliance with the Companys Act related with Internal Financial Control (IFC), the Company appointed KPMG to carry out a study on the processes of the Company and suggest remedial measures if any. Certain process changes were instituted and KPMG reported that the Company is compliant with the requirements of IFC. For the subsequent periods, internal audit has been mandated to specifically carry out audits with respect to the compliance with IFC requirements.

The Company strives to continuously strengthen the internal control systems by adopting standard operating procedures and by delegating roles and responsibilities to various Department heads for effective implementation of the same. This is to ensure that the Company conducts its business with highest standards of statutory, legal and regulatory compliance.

Outlook

In recent years, Indian real estate industry has witnessed the biggest policy changes like GST and RERA. The long term outlook remains attractive due to economic growth, increasing urbanization, employment opportunities, affordability, favourable demographics, urbanization, and preferred location by NRIs, expats and IT/ITES professionals. Further, income tax benefits, lower interest rates and availability of financing options support the growing demand. Management would adopt a cautious approach and observe the developments closely while making decisions. The key focus for us in the following year would be:

• Focus on execution and revenue recognition: There are 10 residential projects currently in execution having a developable area of 4.3 million sq ft. There are another 4 residential projects having a developable area of 2.45 million sq ft which are in various stages of design and approval and are targeted for launch during the coming quarters. This represents a huge growth in the intensity of the business and correspondingly on the revenue and profits of the Company. We are now focused on staying ahead on the cash collection cycle and accelerate execution. The consumers are highly discerning and the market is competitive. For success in the market place timeliness and quality of delivery are the differentiators.

• Compliance with RERA: The Company has been focusing on operational changes to be compliant with RERA. The process includes identification of process which has to undergo change, modification and roll out Standard Operational Procedure (SOP) to be compliant.

• Design and Innovation: The Company has always focused on building a strong brand recall and differentiating itself from the competitors by continuous investments in new design and innovation for projects. Our association with leading firms like KPF,

WATG, Callison, RK Associates and CnT help us develop projects which provide our customers a unique living experience.

• Cash-flow Management - Tight control on accounts receivables and accounts payables with the objective of reducing the interest burden.

• Customer Relationship - Enhance customer experience at each of their touch points starting with at the stage at which we interact with them to assist in selection of a home till the time it is handed over.

Human Resources Development

• NEL employs people across all functions. The Company continues to foster a high performance culture by recognizing good performers and providing them with career enhancing opportunities. Several HR initiatives have been taken for the strategic alignment of the HR function with the business objectives. These initiatives encompass employee engagement, learning & development besides improved internal communication mechanism with employees. With current slowdown, we have consolidated and optimised our resources for effective and productive growth with minimal required resources.

• Our registered and corporate office is located in Bengaluru. This houses employees who oversee our financial, administrative, design and planning and other reporting functions. We have not experienced any material strikes, work stoppages, labor disputes except for the national lockdown imposed due to Covid wherein business operations continued as Work from Home.

• For the development of some of our projects, we also engage third party consultant engineers, architects, interior designers and landscape designers. In addition to our employees, we also engage the services of contractual workers which include tradesmen, car drivers, housekeeping personnel and other skilled, unskilled and semi-skilled workers. Our consultants, contractors and subcontractors who work on our projects also employ a significant labour force.

• Our work-force consists of our permanent employees, consultants and labour work force that work at projects through subcontractors.

Cautionary Statement

Statements in this Management Discussion and Analysis contain "forward looking statements" including, but without limitation, statements relating to the implementation of strategic initiatives, and other statements relating to NELs future business developments and economic performance. While these forward looking statements indicate our assessment and future expectations concerning the development of our business, a number of risks, uncertainties and other unknown factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, general market, macro-economic, governmental and regulatory trends, movements in currency exchange and interest rates, competitive pressures, technological developments, changes in the financial conditions of third parties dealing with us, legislative developments, and other key factors that could affect our business and financial performance. NEL undertakes no obligation to publicly revise any forward looking statements to reflect future / likely events or circumstances.

For and on behalf of the Board of Directors
Place: Bengaluru Nitesh Shetty
Date: July 31, 2020 Chairman & Managing Director
DIN:00304555